Tuesday, Feb 21 2012
• 10 a.m. (ET)

New Efforts to Bail Out Greece

After haggling into the early hours of this morning, Europe agreed to a new bailout package for Greece. The package provides $172 billion in financial aid for the Greek economy. After months of teetering on the brink of bankruptcy the deal will allow Greece to avoid a looming default in March. But the deal comes with new, strict conditions. Many economists now say E.U. imposed austerity measures are strangling the Greek economy. Join us to discuss whether the new deal will save the Greece or merely delay a deeper default.

Guests

Stephan Richter
publisher and editor-in-chief of The Globalist, a daily online magazine on the global economy, politics and culture.

Miranda Xafa
President of EF Consulting and former board member for Greece at the IMF

Scheherazade Rehman
professor of International Business/Finance and International Affairs at George Washington University

Uri Dadush
senior associate and director in Carnegie’s International Economics Program, former director of international trade and former director of economic policy at the World Bank.

Transcript

10:06:56

MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The 17 members of the eurozone agreed to a second bailout package for Greece early this morning. Here with me to look at the implications of the deal for Greece and its eurozone neighbors: Stephan Richter of The Globalist, Scheherazade Rehman of George Washington University, and Uri Dadush of Carnegie's International Economics Program. On the phone with us from Athens is Miranda Xafa.

10:07:34

MS. DIANE REHMShe is president of EF Consulting. Do join us, 800-433-8850. Send your email to drshow@wamu.org. Join us on Facebook or Twitter. Good morning to all of you.

10:07:54

MR. STEPHAN RICHTERGood morning.

10:07:54

PROF. SCHEHERAZADE REHMANGood morning.

10:07:55

MR. URI DADUSHGood morning.

10:07:55

REHMGood to have you here. Scheherazade Rehman, what was agreed to?

10:08:03

REHMANWell, essentially, in return for the $130 billion that Greece is going to get, which is their second bailout, they have agreed that the GDP-to-debt ratio will be brought down to 120.5 percent by 2020, which is a tall order. They have agreed that there will be a 53.5 percent write-down for private creditors. They've also agreed that minimum wage has been cut down, effective immediately, to 22 percent. And salaries of the best paid civil workers will be down 10 percent, but effective months from now.

10:08:44

REHMANThere will be also a permanent representative with the Troika, which is the IMF, the ECB, the European Central Bank, and the European Commission oversight on the ground in Greece to oversee this, and, lastly, one of the most important things is they've established what is akin to escrow accounts where the bailout money will be put in because everyone is so afraid that the Greeks might now follow through or use the money wisely because they are due for elections coming up in April.

10:09:17

REHMAnd what could those elections mean?

10:09:20

REHMANWell, right now, we have a technocrat government in place. After the elections, who knows? In fact, all the major parties of the coalition have actually signed a letter committing to this austerity program and these new bailout rules. But who knows what happens after the election?

10:09:39

REHMSo you're saying, after the election, you could have a whole new parliament, you could have a whole new group that says we're not going to do this?

10:09:52

REHMANOne hopes that won't happen, but it probably will.

10:09:54

REHMYeah, it could.

10:09:56

REHMANYeah.

10:09:56

REHMWhat about the European banks, Scheherazade? Are they prepared to take the hit as well?

10:10:04

REHMANYou mean the European banks, the private banks?

10:10:06

REHMRight.

10:10:07

REHMANAbsolutely, they have taken a hit here, and they understand that it was do or die. If they didn't take the hit and this bailout money was delayed, they would take even a further hit. And so they had to agree to the haircut that they have just accepted.

10:10:23

REHMAnd joining us, as I said, from Athens, Miranda Xafa. She is president of EF Consulting and a former board member for Greece at the IMF. Miranda, what's been the reaction in Greece?

10:10:45

MS. MIRANDA XAFAWell, the reaction is relief because this was a long time in the making. And there were delays in concluding the second rescue package and the PSI, delays which related both to the ongoing negotiations with private creditors, with bond holders, but also delays due to the Greek government's delay in implementing the so-called prior actions that were needed for this program to go through. So this is a great relief because it avoids a hard default, which would happen on March 20 when a 14.5 billion Euro bond, Greek bond matures.

10:11:35

MS. MIRANDA XAFASo, unless the PSI, the private sector involvement, the write-down of the debt and the exchange of the old bonds for new bonds, unless that takes place before March 20, Greece would head for a hard default at that point.

10:11:51

REHMWhat about the reaction of the people, Miranda? Last week, we saw more rioting in the streets. What's the reaction been today?

10:12:05

XAFAWell, the riots in the streets, that you see, is a tiny minority of people who tend to be violent and attack the police. It does not represent the reaction of the Greek people who do understand the need for these painful reforms. This was a long time in the making, and Greece will not get out anytime soon. Trouble was brewing for a long time, but few people raised a red flag, saying that this will end badly.

10:12:39

XAFAWhat happened is that joining the eurozone created the misconception that Greece's standard of living would converge to the eurozone average in one giant leap through debt-financed consumer boom and rapid wage increases that were not matched by productivity improvements.

10:13:01

XAFASo inflation remained persistently above the eurozone average, and resources moved from the internationally competitive sectors, which are price takers in international markets, to the increasingly lucrative sheltered sectors, such as construction and retail trade. So the result was a current account deficit that averaged 10 percent of GDP in the decade since Greece joined the euro area.

10:13:31

REHMAll right. And turning to you, Stephan Richter, what about the rest of Europe? How have they responded to the deal?

10:13:41

RICHTERBasically...

10:13:42

XAFAOther Europeans -- I think there was a lot of relief on the part of the Europeans as well because the last thing they need is a disorderly Greek default that would create contagion in the rest of the eurozone.

10:13:54

REHMAll right, Miranda. Let me turn now to Stephan Richter.

10:13:59

RICHTERIt's, of course, right, what she just said. But I think the important thing for us to realize is that everybody in Europe sees this probably as the high watermark of orderly process. From here on, it's going to go all downhill. This was a very necessary agreement to avoid a catastrophic default. Hopefully, the private banks, enough of them, will take the deal in terms of restructuring the bonds and stuff like that.

10:14:24

RICHTERBut the key problem is -- you know, tragedy is a Greek word and so is catharsis. And what is really needed at this stage is, as she just said, that the entire Greek society reform itself. Now, there are a lot of people in Greece who are willing to do that. Unfortunately, it's none of those in power. It's none of those in the media. It's none of those who are rich. If they haven't immigrated for a long time, they're all taking the whole country as a racket.

10:14:51

RICHTERAnd that leaves all the normal wage earners -- not just minimum wage takers, but small businessmen and so on -- all the people outside of Athens in a very dire strait. Fifty percent of the population now lives in Athens, which is a very unproductive city. They create services and distribute subsidies. And everything that we've heard transfers from the European Union. Greece has a lot of potential -- tourism, agriculture, those kinds of things -- but, basically, they need to compete not with the Germanys of this world but with Turkey next door.

10:15:21

RICHTERAnd Turkey, at a minimum, is highly productive, has a great track record over the past decade, which is very painful to see for the Greeks, remembering the old enmity between the two countries. But, for starters, they would need to bring all their prices down by 30 percent. And there is just very little that anybody in Europe expects, even though they put all a nice gloss on this agreement because they needed to get through this in order to throw the Greeks a lifesaver so that society can remake itself.

10:15:48

RICHTERThe odds with that are very small, unfortunately. One can only hope that self-help will prevail. But, you know, they need to really rethink the entire society from top to bottom. And if you compare that to 1990 and Eastern Europe, you know, the catastrophe after the collapse of communism, these countries went through a very difficult period, but they had a very clear sense that from here on out, we need to do better. We need -- we now have a chance, a fighting chance to create a just society, a democratic society, a growth-oriented society. And that moment hasn't come to Greece yet.

10:16:23

REHMStephan Richter, he is publisher and editor-in-chief of The Globalist, a daily online magazine on the global economy, politics and culture. Uri Dadush, do you think that this deal provides a viable long-term solution, or is it just another stopgap?

10:16:51

DADUSHNo, I don't. It is a stopgap. The profound challenge of Greece is to get growth going again. And as Miranda said, the essence of getting growth going again is to do the opposite of what happened over the last 10 years.

10:17:13

REHMWhat do you mean?

10:17:15

DADUSHWhat I mean is that the Greek economy has to become more outward oriented. Exports have to grow, and it has to become more competitive.

10:17:28

REHMBut how does it do that in the face of this enforced shrinkage, if you will?

10:17:37

DADUSHWell, the enforced shrinkage is supposed to be the way, or a very important part of the way, that Greece becomes more competitive because that means, for example, the reduction in the minimum wage. And so improve the ability of Greeks to sell at reasonable prices on international markets, that's one way. And the second way is what I call the famous structural reforms, and these structural reforms are about liberalizing professions to make it more competitive, liberalizing the labor market to make it more flexible.

10:18:16

DADUSHHowever, the structural reforms take a very long time to work and are politically very, very difficult.

10:18:23

REHMUri Dadush, he's senior associate and director in Carnegie International's Economics Program, former director of international trade, former director of the economic policy at the World Bank. Short break. We'll be right back.

10:20:03

REHMIn this hour, we're talking about the second bailout package for Greece that was agreed to by the 17 members of the eurozone early this morning. Here in the studio, Uri Dadush. He is with Carnegie's International Economics Program. Scheherazade Rehman, she is professor of international business and finance and international affairs at George Washington University, and Stephan Richter of The Globalist.

10:20:45

REHMOn the line with us from Athens is Miranda Xafa. She is president of EF Consulting and a former board member for Greece at the IMF. Just before the break, Uri, you were talking about Greece cutting its minimum wage to a point where it's almost irrelevant. What about the public sector? How much are they going to be able to contribute?

10:21:21

DADUSHWell, the public sector also has to be reduced under the program, over the long duration of the program. They have to cut about 150,000 jobs.

10:21:33

REHMThey've already cut about 15,000.

10:21:36

DADUSHThey have already cut a significant amount. They have to cut a lot more.

10:21:41

REHMDo I understand correctly that the public sector employs 750,000 people and that layoffs in the public sector are actually forbidden by the Constitution?

10:22:00

DADUSHI believe that to be the case, which is not unusual, by the way. I don't know about the Constitution, but in a lot of countries, you cannot fire public sector employees. So this is viewed as a draconian measure, as it would be if the U.S. government, you know, did outright layoffs of 20 percent of its employees. So this is very, very important. An interesting thing to note is that, by the end of the program, Greece's public sector will be really very small by European standards.

10:22:36

DADUSHIt will be more like the public sector in the East European countries, which are less-developed countries, like Romania, than in Germany or France, where the public sector is much bigger.

10:22:47

REHMIs that a good thing or not?

10:22:49

DADUSHWell, it's probably a good thing in the Greek circumstance, but I just wanted to underscore the fact that, in a sense, the other Europeans are asking the Greeks to do a lot more under this program than they have historically done themselves.

10:23:04

REHMScheherazade.

10:23:06

REHMANYou know, Uri's right. But I think that the riots on the streets do account for perception of what's happening. Yes, the public sector will be cut. But I'll give you an example of just what happened. Minimum wage was cut by 22 percent, effective immediately. However, the top salaried civil servants were cut by 10 percent, but over a period of the next four, five months. And so the perception is that the people are getting hurt right now, and the pain for those who have benefited has -- is been delayed.

10:23:40

REHMANAnd I think there is one additional issue. It's one thing for the people who enjoyed all the benefits over the last seven, eight years, to get pension cuts and sort of have pay cuts, but it's the second generation that is fearing that they are not going to get any of the benefits and they are not going to have the job opportunities, which is the real driving force behind some of the young people on the street.

10:24:02

REHMMiranda Xafa, do you believe that the deal that 17 eurozone members agreed to is going to end up rescuing Greece or breaking it?

10:24:21

XAFARescue Greece, if only Greece implements the program in full. In fact, if you read the program, it reads like a blueprint for reforming a post-Soviet bloc country, circa 1990. It includes privatization, administrative reform, labor market reform, product market reform, bank recapitalization, et cetera. And this is certainly positive for medium-term competitiveness and growth, but it also means that the reform process will need to be protracted and politically difficult.

10:24:57

XAFASo some people have argued that a quick way out of this problem would be for Greece to drop out of the eurozone and go back to the drachma, the currency that it used before joining the euro era. But that would be...

10:25:12

REHMDo you believe that would be a good solution?

10:25:19

XAFAI believe that will create chaos. It will create economic and social chaos, and it will not solve either of Greece's problems. Greece has two problems: excessive debt and the non-competitive economy. By going back to the drachma and devaluing the drachma, it will certainly default instantly because the debt is Euro-denominated, not drachma-denominated. But also the problem of competitiveness in Greece is not due so much to high wages as it is to regulatory barriers and restrictive labor practices that raise the cost of doing business.

10:26:03

XAFASo the question is: Can a post-Soviet economy deflate itself back to the competitiveness? And the answer is no. And that is why the program includes so much structural reform, so many measures to tackle the real rigidities that prevent markets from working, that prevent resources from moving away from the government sector and the sheltered sectors into the internationally competitive sector. If that problem can be resolved gradually, Greece will regain competitiveness and will be back on its feet.

10:26:42

REHMStephan.

10:26:44

RICHTERThe problem with this -- Miranda's absolutely right, right? If Lucas Papademos and she joined the government and so on -- I mean, a lot of stuff needs to happen so that the society will be rectified for about 80, 90 percent of the Greek people who are getting screwed in the middle of all of this. But for that to say the technocrats is sort of anti-Democratic and bad, you know, technocrats are only doing the job that the so-called democratic regimes failed for four decades to do.

10:27:10

RICHTERThe Greek public sector is so bloated because both political parties, after the military regimes, just stuffed the apparatus with their own partisans as goodies. That's where PASOK was -- the socialist party was particularly responsible. But the so-called Conservative Party, which is now favored to win the elections, has a leader who was one of the worst guys in terms of budget balance before. He just did nothing

10:27:31

RICHTERSo the real danger here is that this all just written on paper. This is a program that, if all 150 steps were done right, would have a chance. Greece deserves this chance. That's why the Europeans put this deal on the table. Unfortunately, anybody who's ever held power in Greece for the last four decades has a track record, with his cronies, of just making minced meat of anything that's written on paper, and who loses are the Greek people, are the people that they're supposed to represent.

10:28:00

RICHTERYou know, the rest of Europe will do fine. The whole reason why this took so long and why this was so protected was that in the end, there is a big move under way to ring-fence Greece. The issue here is not Greece by itself. That's a small part, 2 percent, of the European economy or something. It's Italy. It's Spain. It's Portugal. There is a vast difference in all these three countries, where, across partisan lines, they have an agreement. We need to stay the course.

10:28:25

RICHTERYou know, the Portuguese are as left-right divided as the Greeks are, but they said even before the elections, we will stay the course -- no footnote, no nothing, we will do it. The Italians and the Spaniards now have a lot of pressure on them because of the fickleness of the Greek situation, and, as Greece, as is unfortunately realistic, will unravel, will try to pull back from this deal, the markets will pressure Italy and Spain to have much more labor market reforms to get to growth-oriented steps.

10:28:53

REHMUri.

10:28:55

DADUSHI don't think you can rule out leaving the euro as a solution, essentially because the current program as structured is not credible. Very few people believe that Greece can grow as the program assumes at 2.5, 3 percent a year beginning in 2013. The -- in an environment where wages are being cut and the government has to shrink by another 5 percentage points of GDP, and the economy is extremely uncompetitive, you're seeing no reaction on the part of exports.

10:29:37

DADUSHSo far, exports are actually declining. So I think the really two big alternatives to this program, one is that the Europeans will forgive a much larger portion of the debt than they have forgiven so far. That is one possibility. Greece will still need about 10 years to adjust. And the other possibility is that Greece leaves the euro.

10:30:01

REHMMiranda, I know you have to leave us. Do you believe that Greece will have the necessary will to implement further reforms?

10:30:17

XAFAWell, the truth of the matter is that Greece has a political class that is ineffective, incompetent and corrupt. They viewed politics as a means of providing favors to special interest groups in exchange for vote buying. And that is another reason why I think returning to the drachma would be a disaster. If you offer these people the printing press, they will just go back to business as usual.

10:30:46

XAFAIt is by cutting off their access to cash, by remaining in the euro, that you can force political change. And I think, by now, the political class has understood the predicament that Greece is in. And they may be incompetent, but they're not suicidal. So I believe they will implement this program because there's no other way out of this mess.

10:31:10

REHMMiranda Xafa, she is president of EF Consulting, former board member for Greece at the IMF. Thank you so much for joining us.

10:31:25

XAFAThank you.

10:31:26

REHMAnd, Scheherazade, I know you wanted to comment.

10:31:30

REHMANYeah. You know, this issue of Greece leaving the euro -- and I agree with all the speakers, that it will drag Greece back into the Middle Ages. But the reason it keeps coming up is, for all intents and purposes, the euro is a foreign currency in Greece. They can't print it. It's like Latin America holding U.S. dollars in debt. And they're stuck, and they're looking for an easy way out. But it's really not an option. I think that this new bailout of 130 billion euro is just a stopgap. Eventually, I think everyone's aware that there will be a structured default on Greece for all of the amount.

10:32:07

REHMAnd what will happen then?

10:32:10

REHMANWell, the problem is the Europeans right now are not ready for a structured default. So the outcome of a -- of unstructured default or disorderly default is so great that it's better to throw money at Greece to buy more time, until that time that they can actually do the structured default.

10:32:28

REHMThere are a lot of people who have compared Greece to Argentina and Argentina's ability to sort of back away and take care of itself. Is there a real comparison here, Uri?

10:32:47

DADUSHThere is a comparison in that Argentina had also locked itself into a very rigid exchange rate system and ran into many of the same problems that Greece ran into, so growth essentially ground to a halt. The Argentina situation actually was somewhat less difficult than Greece's because its debt ratios at the time it defaulted were much, much lower than Greece, about half the level of Greece.

10:33:17

DADUSHBut as -- when they did default and break convertibility, so devalue, there was, indeed, a little period of chaos in Argentina. And for a year-and-a-half or two years, Argentina went through a terrible recession. However, after about a year-and-a-half or so, growth accelerated again. People say -- and I think it's correct -- that it was helped by commodity prices that were rising at the time. But Greece could also be helped by a resurgent global economy in a year-and-a-half from now.

10:33:54

REHMUri Dadush. He is with Carnegie's International Economics Program. And you're listening to "The Diane Rehm Show." We have a number of callers waiting. We'll open the phones now, 800-433-8850. First to Key West, Fla. Good morning, Chris. You're on the air.

10:34:22

CHRISHello, Diane. Thanks for taking my call.

10:34:24

REHMSure.

10:34:25

CHRISI appreciate your transparency in telling your listeners who some of the panel are and who they're associated with in the past. I think that, in this country, we often hear the word Greece used as representing the Greek people. You know, the IMF, World Bank, they're governed -- the head of their government has been replaced by a bankster. The Greek people are the ones suffering, and they're not the ones that put this -- the country in this position.

10:35:02

CHRISThe people that are being bailed out are not the Greek people. It is the banks that hold the bond, that were gambling, that drove them to this point, that are being bailed out by this. Now they're going to privatize their country. Now they're going to take away land. It's -- and use it and sell it. This is a small country with a culture of family and small farms and small businesses. And it's going to be destroyed.

10:35:37

REHMUri.

10:35:38

DADUSHNow, I have the deepest sympathy for what the caller said. The statistics are clear, without getting political about it. Greeks work very hard. They work much longer hours than Germans work, the average Greek. And Greek corporations actually pay more taxes as their share of GDP than American corporations do. These are OECD statistics. So there is a lot of posturing here on the part of the creditors, who, of course -- you know, I call it the golden rule.

10:36:21

DADUSHHe who has the gold makes the rule. The creditors are now painting the Greeks as, you know, something near criminals, but, in fact, it's much more complicated than that. There are fundamental design flaws in the way that the euro was put together, and there were some very, very bad loans made on the part of the big banks that shouldn't have made them.

10:36:44

REHMStephan.

10:36:46

RICHTERAbsolutely right. I mean -- but the question is the past is the past. The banks were being stupid and irresponsible. Goldman Sachs was, you know, the supposed super financial duper institution, was an adviser to the Greek government in order to further screw up the system. Everybody was in it. It was stupid to think that a euro lent to Greece was as safe as a euro lent to Germany and so on.

10:37:08

RICHTERBut as I said, the past is the past. The key issue, per the caller's remark, is that Greece has the structural problem, that it has fantastically able people who are very good businessmen. A significant part of them lives abroad because they looked at their home country's structures and said, I'm too good a businessman or businesswoman. I'm out of here.

10:37:27

REHMI'm getting out.

10:37:28

RICHTERAnd you have a lot of young people. You know, we've had a young member of parliament write on The Globalist that this is the best thing that ever happened to Greece because we can finally clean up and become a more productive society by taking away all the benefits from cab drivers and pharmaceutical companies and so on that don't make sense and don't help the people. That's what this is about.

10:37:44

REHMStephan Richter, editor-in-chief of The Globalist. Short break, right back.

10:40:04

REHMWelcome back as we talk about the Greek bailout that was agreed to by the 17 eurozone members early this morning. There is certainly a fair amount of controversy about it, whether it will heal Greece, pull it back from the brink or whether it simply a stop-gap measure. And, Scheherazade, you had something you want to add to the last points.

10:40:38

REHMANThat's right. You know, there's no question that for the next 10 years, at the very minimum, the Greek people are going to suffer a deep amount of pain that they have never...

10:40:46

REHMWhat does that mean?

10:40:48

REHMANWealth loss, jobs, not having the benefits that they normally were used to, which were quite high at some point, but now even living below the average of the eurozone, it's going to be awful for the next 10 years. But I must say one thing to the last caller. Understand that the governments in Greece were elected. This is a democracy. And they have to be held accountable by the people. They were having a good time for quite some time, and they were enjoying it.

10:41:15

REHMANIt's not that the austerity measures have been put into place that people are reacting. And there -- one other point here is that the banks have been bailed out, and it's not fair. We've seen those Occupy Wall Street movements all over the world because we understand it's not fair. But what is at stake here is a contagion to larger countries like Spain and Italy. If there is a run on Greek Banks, there will most assuredly be a run on Italian and Spanish banks.

10:41:44

REHMANThe last point I want to make is there was gross mismanagement by the top governments, and this is Germany and France, specifically, on actual crisis management of what happened two years ago.

10:41:56

REHMAll right. Here's an email regarding U.S. Banks from Jim. He says: "Greek government officials intentionally engaged a U.S. investment bank to assist them in a financial transaction that hit a large portion of their debt with the objective of creating a false picture of their balance sheet in order to gain E.U. membership. To paint a picture that the E.U. is placing unreasonable demands on the Greeks is irresponsible.

10:42:39

REHM"Greece has forced an entire continent to absorb a large portion of their debt. In the wake of their help, they continue to whine about more concessions without any acknowledgment of their own role in this disaster." Stephan.

10:43:01

RICHTERI think the caller has it somewhat backwards. The last time I checked, most of those debt deals were not initiated by a country's finance ministers. But, very often, especially when it comes to create a financing for countries in dire straits, are often offered up by investment banks who go to finance ministers through their marketing department. So that's one point. The more important point is, I think, it's an entirely futile exercise to start doing one directional blame games because we're all sinners in this.

10:43:28

RICHTERAs Scheherazade said, you know, some governments, the markets, the banks the Greek politicians, the Greek people, everybody. But we need to also be honest about one other thing. That is that we're currently dealing with a level of complexity in resolving this, none of which we've ever seen before because Argentina, by comparison, is peanuts. It was one country helped by a commodity boom, so this was an easy fix almost.

10:43:49

RICHTERHere, it is basically rolling dice, you know, and everybody -- it's like a house of cards that could come down. And what the Europeans are trying to do is basically make sure that Greece is not going to lead to a domino theory but that it is far enough removed from the next domino storm, that if the Greek people decide or the politicians decide, or both of them decide together, that they want to get out of the euro, that they don't want to have any of this anymore, whatever, that then there is an insulation against the next guys.

10:44:16

RICHTERBut everybody has been at fault. I mean, these banks gave loans that were irresponsible in the first place. And it doesn't matter whether they were European, U.S. or anything. Everybody is at fault in this.

10:44:25

REHMBut I want to go back to a point Scheherazade makes, and that is the people and the suffering that they're already experiencing, that they will continue to experience. Some people say the growth in the homeless population has grown, the growth in people who do not have enough food to feed their families. Can that truly go on for 10 years with the whole world watching while the E.U. imposes those kinds of strictures?

10:45:07

REHMANOne of the reasons why this current plan that was agreed upon very late last night has such strict oversight is because they absolutely believe that this cannot go on for too long. And they're worried that the next election will breed politicians who are going to backtrack on some of this because no government can stay in power with this kind of pain on the ground.

10:45:33

REHMSo what are you saying? Even if the next government comes in and decides it doesn't like this deal, they'd throw the whole thing out, and people will be right back where they started, Uri.

10:45:50

DADUSHWell, if the next government tried -- I don't think the next government will be able to just throw everything out. There are too many constraints and too many risks. But what maybe will happen is that the program will simply not work, by which, I mean that, you know, as they cut the spending and they cut the wages, they're not going to get the growth. And since they don't get the growth, they are not going to be able to meet their fiscal targets. And so at some point, the breaking point will be reached.

10:46:25

DADUSHIt can either be reached because the Greeks say, enough is enough, or it will be reached because the core of Europe -- the Germans, the Dutch and the Finns -- the three triple-A rated countries, say, no, we are not going to provide anymore financing. That's when Greece will run out of euros, and that's when Greece will be forced to abandon the euro.

10:46:51

REHMOK. So what you're saying is that now it's not whether Greece will default, but when.

10:47:02

DADUSHYes. That is what I am saying. And the default can be disorderly, as I have just described, or it can be an orderly default, as Scheherazade was talking about before. Of course, the current program that has just been agreed is an orderly default. I mean, it cannot be called by any other name. So there's going to be a second orderly default which will be a -- basically Greeks not being able to repay the loans that the governments are giving it.

10:47:32

REHMOK. So then what does a disorderly default look like? What does it do to the people? What does it do to Greece, Scheherazade?

10:47:46

REHMANIt's more important to ask the question what it does to the rest of eurozone. And the contagion in Italy is what we are worried about. Eventually, the Greeks will default, and the plan is to buy enough time to create a structured default, not for the Greeks to leave the Euro but to just deal with this problem in terms of a structured way.

10:48:07

REHMAll right. I want to take a call from Dean here in Washington, D.C. Good morning to you.

10:48:15

DEANHey, good morning. Look, this is so deep. You know, I feel like I'm ill-equipped to really wade into it, but I'm going to try a little bit 'cause I go back and forth to Greece. My family is from there historically. And I go to the village when I go there, and life is tough in the villages. It always has been. People don't make a lot of money. And, as you said, they work a lot of hours.

10:48:33

DEAN(unintelligible) this joining the E.U. thing, and I kind of observed in the beginning that, you know, Greek is -- Greece isn't really set up like a European country. They don't have big national brands for export. They basically, just like you said, have tourism and agriculture and literally have the means to pay back this money. And the banks in countries, you know, they're astute.

10:48:58

DEANThey loan money where people, you know, either have money to pay back or have assets to seize. And I think people worry that everything in Greece is going to be owned by people outside of Greece because of the weight of these debts, which they'll never be able to pay back. And I think that's what people are afraid of, and that's what they're reacting to.

10:49:16

REHMStephan.

10:49:17

RICHTERI think this is too static an analysis in terms of, you know, now comes privatization, and everybody outside of Greece will own everything. I think the people that are real targets are, you know, Greek investors who have much of their money abroad. But the whole debate as to whether we are going to have a default or inside the euro or outside the euro and back to the drachma, the fact of the matter is Greece needs to do certain things irrespective of this.

10:49:43

RICHTERI mean, we have, for example, that the top income taxpayers still -- I mean, three years, four, five years into this crisis, the Greek tax administration has not been able to levy the taxes from the people that are currently owed -- and I don't mean to back stuff -- just current people who currently have profits on their books and so on. Twenty five percent of income taxes are going uncollected. Under -- you know, pharmaceutical prices in Greece, you know, European pharmaceutical manufacturers say we love selling Greece. At per capita, they spend as much as the United States basically.

10:50:14

RICHTERI mean, for a standard of living that's significantly lower, the Greeks have a lot of these what economists call rents, artificially high prices that nobody can afford. And these are first things that need to be taken care of, and that's the order of business. But the problem is, if basically, you had an -- you know, I go back to the 1990 and Eastern Europe and communism. Now, the Greeks much prefer not to have lived under communism, but you can say one thing, that the communist administration, minus the political oppression and so on, was basically functioning.

10:50:45

RICHTERSo when you took the terrible communist yoke off, you had a lot of bureaucrat civil servants who knew how to do -- how to administer the right way. You know, the political hacks were thrown out, but a lot of people basically knew now with Liberty, Freedom, Democracy and so on how to restructure their country to run it the right way.

10:51:02

REHMOK.

10:51:03

RICHTERAnd that's what failing in Greece.

10:51:04

REHMSince 2010, Greece has passed five austerity measures, but the debt is still rising. Has austerity been the right approach, Uri?

10:51:25

DADUSHFirst of all, I agree with my colleagues that there is no real alternative to austerity in the case of Greece and many other European countries, very simply because the markets are not going to lend them the money. And then that's…

10:51:39

REHMWithout the austerity?

10:51:41

DADUSHYeah, without the austerity. There is no alternative to that today. The big question in the case of Greece is, can the austerity work in a situation where the economy remains profoundly uncompetitive because the exchange rate is fixed, is set in stone as part of the eurozone?

10:52:10

REHMSo you had the debt of Greece rise from nearly 139 percent in 2010 to 159 percent of GDP in the third quarter of 2011 after five impositions of austerity. Where does that leave us, Scheherazade?

10:52:39

REHMANLook, we know that austerity must happen because the markets demanded it, but the question is, was it too much austerity, which is leading to little or no growth? What we're all forgetting here is we're in the middle of a crisis. And I'll give you the analogy of a car that's skidding on ice. When the car is skidding, you must first turn the wheel in the same direction of the skid, and when you regain control, you change direction. There has to be some kind of stimulus plan. Otherwise, there is no growth, and the rest of it's a mess.

10:53:09

REHMSo do you feel that the stimulus that is now coming from the eurozone is going to help Greece?

10:53:20

REHMANToo little, too late.

10:53:22

REHMToo little, too late, Stephan?

10:53:24

RICHTERToo little, too late in the sense that, if you look at another country that starts with G, Germany, you know, 10 years ago basically, they said, we need to do fiscal consolidation because our population is aging. You know, the sky isn't pink and rosy anymore. And so we need fiscal consolidation, but we also need to have labor market reforms because they said, in international markets, with China, everybody else coming on, it gets more expensive.

10:53:46

RICHTERThe Germans did basically labor market reform and some kind of austerity, and the Greeks should have done that from the first place. But these are national parliaments that need to have the will to decide that, and they haven't started diddly from that.

10:53:56

REHMStephan Richter, and you're listening to "The Diane Rehm Show." Let's take a caller in Rye, N.C. Good morning, Richard.

10:54:09

RICHARDYeah, good morning. How are you today?

10:54:10

REHMFine. Thanks.

10:54:12

RICHARDYeah. The point that I wanted to make, your young lady on your panel pretty much made it, which is the Greek people actually are being bailed out because they put these politicians in office, and these politicians put these (unintelligible). So essentially, you know, it is the Greek people. But I guess my greater point is, isn't this a lesson to the United States that you really cannot have a bloated public sector, pay them a great amount of money, have unsustainable pension plans?

10:54:43

RICHARDAnd in our case, I like the idea of health care for everybody, but I think the program that we have in place was a poorly written...

10:54:51

REHMAll right. I don't want to get off into the U.S. program. But does he have a good point, Uri?

10:55:00

DADUSHHe has a good point. But bear in mind that the debt situation of the United States is not nearly as bad as it is in Greece at the moment. We are also in the middle of a recession. We need some help. The United States has both the advantage and the disadvantage of being a safe haven, the dollars, the reserve currency that makes it easier for governments to go on fiscal deficits for a long time. And so for that reason, there is a caution to the United States that is very important from the Greek situation.

10:55:35

REHMScheherazade, how would you rate Angela Merkel's handling of this?

10:55:45

REHMANI would say not very effective in terms of crisis management. But she has a population that she has to pander to, and her popularity is rising because of the stringent austerity measures. In terms of managing the crisis in Europe and leadership, not very well.

10:56:03

REHMStephan.

10:56:04

RICHTERI think that's unfair. I'm not a fan of hers personally in political terms, but I do want to say that, as I said earlier, we are almost in unprecedented territory. This is hyper complex. There have been 5,000 experts with 10,000 suggestions. And the difference between experts and political leaders is that their neck is on the line. And, yes, this has been slow in coming. But I think we're learning a lot of things for the future. And on that, she gets at least a decent grade.

10:56:32

REHMLast word, Scheherazade.

10:56:34

REHMANI think that what happened was market failure and Angela Merkel not understanding the markets. The world has changed, and the damage of bad policy is too much.

10:56:48

REHMScheherazade Rehman of George Washington University, Stephan Richter -- pardon me -- publisher of The Globalist, and Uri Dadush of Carnegie's International Economics Program, thank you all so much.

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